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Wednesday, 31 May 1972
Page: 2344

Senator COTTON (New South WalesMinister for Civil Aviation) - I now incorporate the second reading speech. (The document read as follows):

This Bill to extend and amend the provisions of the Industrial Research and Development Grants Act 1967 was foreshadowed by the Prime Minister (Mr McMahon) in another place on 1st March 1 972 when announcing the extension of the Government's incentive provided under the current scheme for a further 5-year period from July of this year. The purpose of the legislation introduced in 1967 was to provide an incentive that would induce Australian manufacturing and mining companies to allocate more of their own funds to industrial research and development activities as a means of improving products and processes. This remains the objective behind the provisions and amendments which the Government is now introducing.

The ability of Australian industry to compete with overseas producers, both in Australian and world markets, depends to a considerable degree on achieving a high level of research and development, bringing with it not only new products and processes but a build-up over time of a higher technological capability and capacity throughout Australian industry. The arrangements, introduced in 1967, are administered by the Australian Industrial Research and Development Grants Board. They operate by providing grants to Australian industrial and mining companies which increased their expenditures on research and development salaries and contracts between a particular year - the grant year - and a fixed base year - .1965-66. In addition, the actual net cost of plant and equipment purchased in the grant year is also eligible for grant, but with the provision that at no time would a grant be approved in respect of net plant expenditure which would result in the cumulative grants for plant expenditure exceeding the cumulative grants given for salary and contract expenditure.

The Act contains some broad rules which companies must comply with before they become eligible for a grant. A company must be incorporated in Australia and carrying out manufacturing or mining operations. Research and development operations must be performed by professionally qualified persons or by persons working in direct assistance to a qualified person. One reason why the scheme has worked well is that it contains a minimum of administrative requirements and obligations.

There is no doubt that the present Act has attained a good deal of success, and a significant portion of increased industrial research and development by companies over the past few years must be attributed to the incentive. The Australian Industrial Research and Development Grants Board states in its Fourth Annual Report, that of the 808 companies which had received grants by June 1971, 54 per cent (440) did not perform any industrial research and development in the base year 1965-66. The Board earlier estimated that there had been an increase of 64 per cent in the number full time professionally qualified persons engaged on industrial research and development between 1965-66 and 1968-69.

However, recent examination has shown that there are many more companies with a technological capacity that are still not undertaking research and development and there is still scope for others to lift the level of their research activities. A recent official survey shows that of some 13,000 manufacturing and mining companies approached, only 1,320 replied that they had incurred any industrial research and development expenditure in 1968-69 and only 546 companies qualified for a grant in respect of that year.

The Government has decided that a broad incentive along existing lines should continue with, as at present, general grants for increases in eligible expenditure up to $50,000 and selective grants for eligible expenditure over $50,000. At present the general rate of grant is 35 per cent. The Government has announced that the general rate of grant for the first year of the extended scheme, 1972-73, will be increased to 50 per cent. It is proposed that in future the general rate will be announced at least 6 months before the commencement of the relevant grant year. As at present, rates for selective grants will be determined by the Grants Board in accordance with national interest criteria specified in the Act, and having regard to the total funds available.

In the light of experience of the existing scheme the Government has decided on a number of changes affecting the operation and administration of the system to ensure the continued effectiveness of the incentive. Changes proposed by the Government, which I will shortly outline in more detail, affect principally the base period provisions, the range of items eligible for grant, the treatment of salaries and wages of employees engaged for part of the year on industrial research and development, the treatment of plant expenditure, and conditions governing eligibility of companies for grants, as well as a number of amendments of an administrative nature designed to strengthen and clarify certain areas of the Act's operation.

The base period under present provisions is the financial year 1965-66. A fixed period has a number of disadvantages. A company, for example, may happen to have had an abnormally high level of expenditure in that particular year. Also a fixed base can eventually become so remote from the grant year that the incentive for companies to continue to increase their industrial research and development effort is no longer effective.

The Government therefore proposes a base period of 3 consecutive years. Base expenditure will then be calculated by taking one-third of the aggregate expenditure in the base period. This will average yeartoyear fluctuations in expenditure. In addition, there will be a moving base maintaining constantly a clear gap of one year between the grant year and the end of the base period. This will provide a continuing incentive for companies to increase the level of their industrial research and development expenditures year by year. Allied to this will be removal of the so-called 'inflation adjustment' by which, under section 29 of the current Act, the Board is required to reduce a company's eligible expenditure by in effect notionally increasing the research and development salaries and wages paid by the company in the base year in line with increases in salary and wage levels between the base year and the grant year.

Items of expenditure which qualify under the present Act are salaries and wages of personnel employed essentially full-time on industrial research and development for the whole of the year; contract work for a firm undertaken by an approved research organisation, and allowable plant expenditure. The restriction of expenditure allowable under the present Act to these items has given rise to some inequality of treatment between companies which conduct industrial research and development work in their own plants and those which have industrial research and development performed for them by an approved research organisation. The Government therefore proposes to allow a much wider coverage of in-company items of expenditure. This will largely or completely eliminate any existing advantage that contract work may have over in-company work under the present legislation.

Provision will therefore be made to prescribe by regulation a consolidated list of allowable items of expenditure incorporating both existing and proposed new items. This list will include the following: Salaries and wages of industrial research and development employees including, as specified, those employed for part of the year; administrative salaries and fees; provisions for superannuation, long service leave and workers' compensation; travel; hired staff; materials; technical information and reference services; plant including pilot and prototypes; repairs and maintenance work on plant; rent and leasing charges for the use of buildings, including notional charges where the buildings are owner-occupied; printing, stationery and general supplies; cleaning costs; telephone rentals and charges; light, power and water; computer charges; insurance; and contract expenditure.

The proposed inclusions do not affect of course the basic intention of the scheme to allow for grant purposes only those costs clearly identifiable with industrial research and development activities which involve systematic experimentation or analysis in the fields of science, engineering or technology. Furthermore, the allowance of these items would be subject to compliance with all the other requirements of the Act, for example, satisfactory records of expenditure and professional qualifications.

In the present Act only the salaries or wages of employees working essentially fulltime on industrial research and development who are themselves professionally qualified persons or who work in direct technical assistance to such a person may qualify as salary expenditure in grant years. In many cases, however, even for large companies, the most efficient use of highly qualified people involves their use from time-to-time on activities other than research and development. Moreover, for many small companies, especially in industries where seasonal factors operate, industrial research and development performed for part of a year could be a necessary transitional stage before undertaking such work on a full-time basis. Under the amended arrangements it is proposed that periods of employment on industrial research and development of not less than 4 consecutive working weeks will qualify for grant purposes. Other costs, for example involving materials, technical information services and repairs to plant and equipment, are important areas of industrial research and development expenditure and their inclusion will be of substantial value to a wide range of companies.

Because the basic objective of the legislation is to provide Australian companies with an incentive to increase their research and development effort, the expenditure eligible for grant is in the main, the increase in expenditure between the base period and the grant year. There is, however, an important exception, that is, expenditure on plant and equipment. Plant by its nature warrants special treatment. A significant part of total expenditure on plant incurred in research and development is spent on the construction of prototypes and pilot plants. The Government recognises that this type of expenditure is absolutely essential to the successful conclusion of much of the most important research and development work carried out in industry. It is in many cases the essential link between laboratory research and industrial application. However, the high cost involved can easily be a strong deterrent to Australian companies with limited financial resources. Acknowledging the key import ance of this type of expenditure the Government proposes that all net expenditure on pilot plant and prototypes incurred in the grant year be eligible for grant purposes.

This will also ensure that companies will not be penalised for incurring peaks of expenditure from time to time on a pilot plant, or a prototype. The inclusion of sporadic expenditure of this type in the base period could seriously reduce a company's eligibility for grant for several years simply because of the peaking effect of this type of expenditure in a particular year. This could seriously reduce the effectiveness of the scheme.

Expenditure on plant required for research and development work, other than expenditure on pilot plants and prototypes is, of course, in the main, designed to increase the capacity of the company to carry out research and development. However, to some extent, such expenditure is incurred to maintain existing capacity, lt is therefore proposed in principle to treat as eligible expenditure, that expenditure on plant, other than pilot plants and prototypes, which represents an increase in the capacity of the company to carry out research and development. The practical basis which it is proposed should be adopted for the application of this principle is to allow total expenditure incurred on such plant in the grant year less depreciation at 10 per cent on the value of such plant on hand at the beginning of the grant year.

Experience with the current Act has brought to light some areas where improvements of a lesser or administrative nature could be effected in addition to the major matters to which I have already referred. It is therefore proposed that a number of amendments be made including a direction to the Grants Board that in certain cases of company takeovers, mergers and re -organisations it should make the necessary adjustments to ensure that the level of eligible expenditure is equitable in terms of the actual industrial research and development activity of the companies concerned. It is proposed that the incentive will extend to manufacturing and mining operations in such areas of the seabed adjacent to Australia as are prescribed.

Eligibility for grants under the present Act extends only to incorporated companies carrying on in Australia in the relevant grant year the manufacture of goods or mining operations. The Government proposes a number of amendments affecting this provision. One amendment will be to include industrial companies set up under Australian laws which do not confer incorporation. Firms which do not commence manufacturing or mining operations until the year following the relevant research and development will become eligible to qualify for grant. A further amendment will ensure that companies which do not actually perform the manufacturing process themselves but sub-contract the manufacture of goods to other companies may be regarded as eligible for grant purposes.

Annual reports will in future be made on a financial year basis rather than a grant year basis and the Board will be authorised to publish at any time, not just in its annual reports, information regarding the amounts of grants paid to companies by the Board.

Honourable senators will be aware that a requirement of the Industrial Research and Development Act is that for eligibility purposes the employees of a company must either be professionally qualified or be working in direct assistance to a professionally qualified person. This particular provision aims at upgrading industrial research and development standards of work. It is expected that this encouragement for industry to employ more of Australia's professionally trained technical people will help to promote the future development of Australia's technological capability.

The results to date are most encouraging and as already mentioned, it is the estimate of the Grants Board that there had been an increase of 64 per cent in the number of professionally qualified persons engaged on industrial research and development between 1965-66 and 1968-69. Australian industry and the community in general cannot afford to lose too many of its professionally qualified people to other industrialised countries.

To overcome some of the problems which have arisen in this area, it is proposed to modify the definition regarding professional qualification and allow the

Board to accept either suitable qualifications granted by an institution of tertiary or technical education or alternatively, appropriate membership of a professional institute recognised by the Board. However, the Government believes it important to retain a requirement as to professional qualifications.

Finally, in continuing a broad, flexible and proven incentive with certain modifications, it is the Government's expectation that such encouragement will provide a basic spur to accelerate the development of Australian industrial technology over the next 5 years of the scheme. Indeed, the Government expects that each company which participates in the scheme must be conscious that it has an obligation to contribute to this national objective. It is for this reason that companies will be required under the Act to give an undertaking that they will exploit their industrial research and development on normal commercial terms for the benefit of the Australian economy.

Because of the increasing importance of Australian industrial research and development the Government intends to remain in close touch with developments in this area with a view to implementing further policies at a future stage that would be in keeping with the needs of industry and the community in general. I commend the Bill to honourable senators.

Debate (on motion by Senator Murphy) adjourned.

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